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Friday September 28, 2007

USD freefall - where does it end?

Today on the currency exchange markets, the Canadian dollar became worth more than the US dollar, crossing the $1 mark in the afternoon. Is it headed for the heights of the 1970s when 1 Canadian dollar bought $1.07 US dollars? Or will it go even further? The important point to note here is that it's not that the Canadian dollar has become better, rather that the US dollar has become worth less as investors seek to move money elsewhere due to signs of a struggling US economy (weak housing market, low consumer confidence, exports of durable goods trending down.)

The nail in the coffin for crossing this benchmark, this time, was the drop in interest rates by the US Federal Reserve by .5%. Not only was this more than what the market expected (.25%) but it is not expected to be the last drop in interest rates by the US fed.

The casual observer might wander why the dollar has dropped now, rather than in the years earlier as interest rates were low then too. The answer here is because the US economy is struggling to get back on its feet. After the dot-com-bomb and 9-11 related recession, most of the other western economies seem to have recovered and are now moderately prosperous...except in the USA. Of course it doesn't take a genius to notice that this period of depressed US dollar value also coincides with the US government needing to fund its invasion of Iraq, spending billions of dollars that it otherwise wouldn't need to. One can but hope that a change in President will also bring a change in the fortunes of the strength of the US dollar.